For those of you unaware of IHT, it is a levy imposed on your estate when you pass away being a UK Domiciled person. The current levy is 40% of anything over the value of GBP325,000 as a single person. If you are married to a fellow UK Domiciled person, your estate will pass to them TAX-FREE but when they pass away, your children or other heirs will receive a bill of 40% over the value of GBP650,000. If you are married to non-UK person, your allowance is GBP325,000, they have an allowance of GBP325,000 therefore a total of GBP650,000 – anything over this is taxed at 40%. From April 6th2017, if you have property in UK, you receive a further GBP100,000 allowance BUT this must be seen as your primary residence/home. (You would then be UK Domicile.)
IHT is a global tax meaning that it is levied on your world-wide assets, not just the ones held in UK.
The confusion in knowing if your estate is taxable is to understand your Domicile. There is a huge difference with Residence and Domicile. You can be non-resident UK after 4 years of not earning any income in UK but be careful of your connections to UK when you leave and how many days you are allowed to visit before becoming UK resident for income tax. If you have a home in UK, visit more than 90 days in one year and have children in (boarding) school, you can only go to UK 45 days the year after without being income taxed – this would be on your income from any country. Many people have been caught out by the new statutory rules.
If your parents are UK Domicile and/or you were born in UK, you are UK Domicile of Origin to start. You can elect a Domicile of Choice elsewhere BUT this has to be seen as your “home.” You can do this by working and paying income tax in the new country, buying a home to live in, have your children go to school, join local clubs etc but it does not happen overnight. Being outside of the UK does not count alone. You need to have lived somewhere for a long-time, minimum 15 years if you look at the rules for becoming UK Domicile (you must be in UK for 15 out of the last 20 years to qualify.) Many people have been to many countries since leaving the UK and this does not count as being “non-Domicile.”
You cannot hold personal assets in UK i.e. a home or car as this would be seen by HMRC as you never leaving in the first place. Everything has to be given up and if you are going back to UK for visits, it must be seen as a vacation (or business trip) and not a return. Previously, there have been cases where HMRC have confirmed someone as UK Domicile by simply still being a member of the local football team, and playing in the annual tournament.
You must be careful about where you want to be home as many countries around the world will not let you stay forever as a foreigner. Assume that you want to elect Hong Kong as your Domicile of Choice. You cannot do this for 7 years as you must apply for a Permanent Residence to stay in Hong Kong. You buy a home, send your children to school, have a job or business and join various clubs to show permanence. As long as you have relinquished personal assets in UK, you could claim Hong Kong as home after 15 years.
HMRC used to provide a letter of opinion regarding Domicile but no longer do this. You can get a QC opinion (they will not guarantee) but this would cost around GBP10,000 – GBP15,000 as lots of investigation has to be done.
Hong Kong being expensive and having lack of space makes us want to consider somewhere else for retirement such as Thailand or Malaysia. You can set up new homes up there BUT whilst you do so, your estate defaults back into UK territory for IHT. During the time that you are setting up your new Domicile of Choice, all of your assets would be assessed for IHT should you pass away. This may be at a point in our lives that we are most affluent, therefore making the IHT bigger.
There are many measures to prevent or reduce the bill such as Trust planning but you would need to understand your initial position to choose the right path. Rules and regulations have changed so much in the last decade that it is important for you to understand your options.
For example, if you are married to a non-UK Domiciled person, you can gift up to GBP650,000 to that person, have them hold the assets in Trust (Excluded Property Trust) with you as an included beneficiary. This removes IHT and allows you to still benefit from the assets.
If you have a UK Domicile spouse and will return to UK, you can set up a Trust (Discounted Gift or Future Benefits) which allows the majority to be tax-free then full amount to be exempt of IHT after 7 years* and also build tax-free income for your lifetime.
*if you pass away in the first 3 years, 100% is payable, 4th year then 80% is payable, 5th year then 60% is payable, 6th year then 40% is payable, 7th year then 20% is payable. After 8th year, no taxes are payable.
You can also insure the bill if you do not want to move assets or you do not have enough. Once you know the amount of the levy, you can have this amount insured and set in Trust to the beneficiaries. The value of the sum assured is not counted as belonging to you as you set the plan up via Trust and your beneficiaries would receive a sum payable to HMRC.
There are other mechanisms available to remove or mitigate the tax and with never-ending changes to rules, it is worth paying attention to. Common Reporting Standards (tax-offices talk to tax-offices) are under way around the globe so if we ignore the threat, HMRC will gain.
Please feel free to contact me if you would like further information on IHT and/or how to mitigate the amount payable. It can be done transparently with efficient planning.
Annette + 852 2542 2285